Monday, July 27, 2009

VC Limited Partners -- Are You InvestNING in Marketing Rather than Sound Investments?

Last week I tweeted about VC firm LightSpeed Venture Partners' $15 million investment in social networking site Ning at a $750 million valuation. Though the press seems to love Ning, it is highly doubtful that the company is monetizing in any real way -- and, I see no reason for this to change any time soon (especially with its traffic apparently "flatlining").

So, especially in these crazy economic times where cash is king (or, at a minimum, sound investment strategies), why would LightSpeed seemingly be throwing cash to the wind. TechCrunch posits marketing. Pure and simple, marketing. Many VCs frequently want to associate themselves with name brands and Silicon Valley darlings -- and Ning fits the bill. Remember, apart from the relentless love Ning has received from the press, Marc Andreessen is a founder/investor. "The company you keep", indeed.

TechCrunch concludes that LightSpeed is simply trying to raise its profile and panache in the Valley. But, at a price tag of $15 million? That would be a pretty hefty ad spend.

As TechCrunch further points out, however, there is more than meets the eye here. It is highly likely that LightSpeed received a liquidation preference as part of its investment, meaning that it would get its cash paid back back first in any private or public sale. And, Ning IS a likely acquisition target given its high profile, whether or not it will ever make money. (In fact, it wouldn't surprise me if a major media company were to buy Ning for its own marketing reasons and in an effort to raise its own online profile and panache.)

Seen in this light, TechCrunch concludes that LightSpeed's investment makes sense.

But, does it? As an investor, do I really want my money to be spent on marketing rather than good old fashioned sound investment parameters and decisions? Do I really believe that my general partners will attract better deal flow by making questionable investments? And, do I really believe that my firm will be more highly respected as a result?